Financial record keeping

Financial record keeping 01 Introduction All businesses and many other types of organization will need to keep records of any financial transactions that take place. However, it makes sense to introduce some accounting terminology before we look at any system of recording financial transactions. We will begin by explaining some of the frequently used terms whose meaning may not be immediately obvious. These terms are assets, liabilities and capital : Assets are resources that are used within the business. These can take the form of physical resources used to facilitate production, such as premises and equipment. Assets can also include resources which are used as a part of the production process, such as materials that are going to be converted into goods, the cash used to purchase more assets and the outstanding amounts owed to the business by its customers. Liabilities are debts of the business that are outstanding. These are any borrowings which the business will repay at some point in the future. These can be short-term debts which are to be repaid in the next few days, such as an expense which has yet to be paid, but can also be long-term debts not to be repaid until many years in the future, such as a mortgage. Capital refers to the value of the owner s resources placed within the business. This can take the form of money invested in the business but can also take the form of owner s assets brought into business use, such as the owner s vehicle. The withdrawal of capital from the business by the owner is known as drawings. The capital, along with the liabilities of the business, enables the business to acquire assets which can be used as part of the business operations. This leads us to the accounting equation, which can be simply stated as follows: Assets = Capital + Liabilities

2 Accounting for Non-Accountants This equation must always hold true. To explain why the equation always holds, we must consider what the equation is telling us that the resources in use within the business must have been financed either from the owner s resources or by borrowing resources. Once the business has become established and if the business is profitable, we can modify the equation to allow assets to be financed out of the profits of the business in addition to the capital and liabilities. The process of recording and maintaining records of financial transactions is known as bookkeeping. However, there are two types of bookkeeping that are commonly practised by business organizations single-entry and double-entry bookkeeping. Single-entry bookkeeping Very small businesses (usually one-person organizations known as sole traders) and other types of organization such as charities, clubs and other small not-for-profit organizations may keep their financial records through a process of single-entry bookkeeping where each transaction is recorded as one single entry. This is bookkeeping at it simplest and often can be as basic as the maintenance of only a receipts and payments account. An example of a receipts and payments account is shown in Figure 1.1. Figure 1.1 Receipts and payments account 2013 Receipts 2013 Payments 1 Feb Capital 1,000 4 Feb Purchases 230 8 Feb Sales 320 6 Feb Electricity 89 12 Feb Loan: R Day 750 12 Feb Purchases 195 20 Feb Sales 275 28 Feb Balance c/d 1,831 2,345 2,345 1 Mar Balance b/d 1,831 This account shows all the monies received by the business and all the monies paid out by the business. The balance left over at the end of the month represents the current amount of money still left in the business bank account. The receipts and payments account is more commonly known as a cashbook. The cashbook will record all transactions involving money either being received or being spent either in the form of cash or as money taken from or paid into the firm s bank account. If a firm maintains a receipts and payments account as its main financial record it will still need to keep records and details of the types of payment and types of receipt in each transaction. This will enable a firm to calculate

Financial Record Keeping 3 the level of profit or loss generated. However, these extra details will often be kept in a memorandum form meaning that they are not part of the firm s accounting system, but are there as financial records to provide information only. A more detailed variation on the cashbook can be used if managers want to monitor and control the type of expenses paid out by the firm more closely. A multi-column approach to the cashbook would be well suited to a business that wanted to keep records that show the effect of VAT (Value Added Tax) separately from its overall purchases and sales. An example of a multi-column cashbook appears in Figure 1.2. Figure 1.2 Multi-column cashbook Receipts Payments 2014 Details Bank Sales VAT 2014 Details Bank Purchases VAT Other expenses 1 Apr Balance b/d 640 2 Apr Insurance 99 99 11 Apr E Mahoney 480 400 80 3 Apr P Beard 300 250 50 15 Apr F Tindall 6 8 Apr K Sutton 120 100 20 15 Apr Wages 280 280 In Figure 1.2 the analysed columns enable a firm to keep records for VAT, which is necessary once firms reach a certain size (as measured by their sales turnover). Problems with single-entry bookkeeping Although popular with very small organizations, there are a number of limitations in relying on single-entry bookkeeping as a method of keeping financial records. 1 In the receipts and payments account, expenditure will appear but this does not allow the separation of expenditure on day-to-day running expenses and expenditure on assets. This is an important distinction for when a firm wants to calculate the level of profit for the period, assets would not normally be deducted as expenses. 2 Double-entry bookkeeping has a number of built-in checks, which means it is easier to spot mistakes with double-entry accounting (though mistakes still occur). Single-entry bookkeeping has no self-checking mechanism. 3 Attempting to control expenditure will require detailed records of where a business spends money. This is not easy unless there are separate records (ie individual accounts) maintained for each type of

4 Accounting for Non-Accountants expense. This limitation can be minimized through the use of a multi-column cashbook. 4 Lack of full accounting records will make theft from the business by business employees more likely. Obviously a one-person organization will not face this problem. Double-entry bookkeeping Once a business begins to grow beyond a certain size and certainly once the maintenance of financial records moves beyond the very straightforward, it will make sense for the financial transactions of the business to be recorded using the double-entry system of bookkeeping. It is widely believed that the system of double-entry bookkeeping was developed and formally set out by Luca Pacioli in the late 15th century. The term double-entry arises out of the fact that each and every financial transaction will require two entries. These are known as a debit entry and a credit entry and each will be recorded in a separate account. The account in which the transaction is recorded will depend on the nature of the transaction. An example of how a double-entry account would appear is shown in Figure 1.3. F i g u r e 1.3 Example of double-entry account presentation Account name Debit side (Dr) Credit side (Cr) Date Account details Amount ( ) Date Account details Amount ( ) Given the T -shaped appearance of the accounts they are often referred to as T accounts. Accounts will be opened and an entry made in the account for each different type of transaction that the business undertakes. This means that there will be separate accounts for each type of asset, each type of expense and each type of income. In addition there will be separate accounts opened for every individual credit supplier and credit customer of the business. All the transactions between the business and the owner will also be recorded in either a capital account or a drawings account, depending on whether the owner is adding resources to or withdrawing resources from the business. There are different rules to be applied when making entries on the bookkeeping system to tell us which side of the account a transaction is to

Financial Record Keeping 5 be. Many of the basic transactions would involve the rules for double-entry bookkeeping illustrated in Figure 1.4. FIgurE 1.4 Rules used in double-entry bookkeeping All asset accounts All liability accounts All capital accounts Debit Credit Debit Credit Debit Credit Increases Decreases Decreases Increases Decreases Increases All expense accounts All income accounts Debit Credit Debit Credit Increases Decreases Decreases Increases These rules will make more sense if we see some examples of them in action. Example 1.1 On 3 June 2013, the owner of the business places 2,000 of her own money into the bank account of the new business. Bank 2013 2013 3 Jun Capital 2,000 Capital 2013 2013 3 Jun Bank 2,000 Explanation Here the asset of bank is increasing, which requires a debit entry, and the capital of the business (resources from the owner) is also increasing, which requires a credit entry. Notice how each account in effect cross-references the account containing the other entry for the double-entry transaction. This facilitates the ability to check that the system of bookkeeping is being correctly maintained.

INDEX NB: page numbers in italic indicate figures or tables absorption costing 112 23 allocation of direct costs 117 apportionment and reapportionment of overheads 117 21, 118 global overhead recovery 114 16 multi-department overhead recovery 116 overabsorption 122 23 overhead absorption rate (OAR) 121 22 problems with 137 58 underabsorption 122 23 vs marginal costing 157 59 accounting concepts 73 82 accruals 51 55, 75 consistency 74 75 going concern 74 historical costs 78 materiality 76 money measurement 76 77 objectivity 77 78 prudence 74 realization 77 recognition 77 review questions 79 82 separate entity 76 see also accounting standards accounting rate of return (ARR) 229 30 accounting ratios see ratio analysis accounting software 14 accounting standards 78 79, 293 311 Accounting Standards Board (ASB) 294 95 Financial Reporting Council 294, 294 Financial Reporting Standard for Smaller Entities (FRSSE) 303 07 Financial Reporting Standards (FRSs) 79, 295, 303 draft FRS 2 303 for micro-entities 307 08 future options for 301 02 Generally Accepted Accounting Principles (GAAP) 78 79, 293 94, 295, 309 10 future of 301 02 International Accounting Standards (IASs) 79, 308 09 IAS 1 267 68, 269, 276, 278, 281, 283 IAS 2 274 IAS 7 284, 315 IAS 16 269 70 IAS 18 279 80 IAS 27 274 IAS 28 273 IAS 37 275 IAS 38 270, 271 IAS 40 270 International Accounting Standards Board (IASB) 73, 79, 294, 296 97 Conceptual Framework 73, 297 300 International Financial Reporting Standards (IFRS) Foundation 295, 296 International Financial Reporting Standards (IFRSs) 79, 296, 308 IFRS 5 273 review questions 311 Statements of Recommended Practice (SORPs) 295 Statements of Standard Accounting Practice (SSAPs) 79, 295, 303, 310 Urgent Issues Task Force (UITF) 294, 295 Accounting Standards Board (ASB) 294 95 accruals (accounting concept) 51 55, 75 acid test ratio 348 49 activity-based costing (ABC) 128 30, 130 aged debtors schedule 217 18 amortization 272 annual return 263 92 auditor s report 265 66 contents overview 264 65 directors report 266 67 International Accounting Standard (IAS) 1 267

366 Index notes to the financial statements 284 86 review questions 290 92 statement of cash flows 284 statement of changes in equity 282 84 statement of comprehensive income 278 82 statement of financial position 268 78 worked example 287 89 asset turnover (ratio) 342 43 assets 1, 34 37 bank balance 37 cash balance 37 current assets 35 36 depreciation 55 60, 75 asset disposal 59 60 and the balance sheet 58 59 cost of asset 56 depreciation method 56 58 expected useful life 56 residual value 56 intangible assets 34, 35, 77, 269, 270 272 inventory 36 investments 35 non-current assets 34 outstanding balances 37 short-term investments 37 tangible assets 34 trade receivables 36 auditor s report 265 66 average cost method (AVCO) 274 bad debts 60 61 balance b/d 8 balance c/d 8 balance sheet 33 49, 42 adjustments to 51 71 accruals concept 51 55, 55 bad debts 60 61 depreciation 55 60 discounts 61, 62 doubtful debts 61 prepayments 52 53, 55 review questions 66 71 assets 34 37 bank balance 37 cash balance 37 current assets 35 36 depreciation 55 60, 75 intangible assets 35 inventory 36 investments 35 non-current assets 34 outstanding balances 37 short-term investments 37 tangible assets 34 trade receivables 36 capital 39 40 in a limited company 39 40 format of 40 41 horizontal format 40 vertical format 40, 41 see liabilities review questions 43 49 Bannerman ruling 266 batch costing 124 25 BDO International 266 bonus issue 258 59 bookkeeping 8 11 balancing accounts 8, 8 11 trial balance 11 12, 12 worked example 9 11 daybooks 13 14 double-entry bookkeeping 3, 4, 4 8 accounting software 14 examples 5 8 rules of 4 5, 5 three-column accounts 14, 14 ledgers 13 review questions 15 20 single-entry bookkeeping 2 4 multi-column cashbook 3, 3 problems with 3 4 receipts and payments account 2, 2 terminology 1 assets 1 capital 1 liabilities 1 books of prime entry 13 break-even analysis 139 46 break-even chart 140 41, 141 break-even output level 142 44 limitations of 145 46 margin of safety 144 45 total costs 140, 140 total revenue 139, 139 budgeting 183 205 cash budget 187 90 example budget 196 200 incremental budgeting 200 01 master budget 187, 192 materials budget 187 production budgets 187, 190 92 review questions 202 05 sales budget 187 uses of budgets 183 87 control 186 coordination 186 forecasting 184 85

Index 367 motivation 186 87 planning 185 zero-based budgeting 201 02 buffer level (inventory) 192, 215 capital 1, 39 40 in a limited company 39 40 capital investment appraisal 223 44 accounting rate of return (ARR) 229 30 considerations capital budgets 239 economic climate 239 costs and benefits 224 definition of capital investment 223 24 discounted cash flow 230 34 compound interest 231 discount factors 232, 232 weighted average cost of capital (WACC) 232 33 discounted payback 238 internal rate of return (IRR) 235 37, 237 net cash flows 225 26 net present value (NPV) 234 35 payback 226 28 review questions 240 44 sunk costs 224 cashbook 2 3, 13 14 cash budget 187 90 cash discounts 61, 218 19 cash flow from financing activities 319 cash flow from investing activities 318 19 cash flow from operating activities 316 18 direct method 316 indirect method 316 17 interest and dividends 318 cash sales 220 Companies Act 2006 246 consistency (accounting concept) 74 75 continuous operation costing 123 24, 124, 127 28 process costing 127 28 service costing 128 contract costing 125 27 convertible shares 250 cost centres 108 cost units 108 costing 107 36 see absorption costing activity-based costing (ABC) 128 30, 130 continuous operation costing 123 24, 124, 127 28 process costing 127 28 service costing 128 cost centres 108 cost units 108 direct costs 108 09 direct expenses 109 direct labour 109 direct materials 108 fixed costs 109 10, 110 stepped fixed costs 110, 110 indirect costs 109 life-cycle costing 131 marginal costing 137 63 and break-even analysis 139 46 and closing down a business segment 154 57 contribution 138 and make-or-buy decisions 149 52 and optimal production plans 146 49 review questions 159 63 and special order decisions 152 54 vs absorption costing 157 59 review questions 132 36 sources of information 107 specific order costing 123 27, 124 batch costing 124 25 contract costing 125 27 job costing 124 standard costing 166 81 review questions 179 81 standards 166 67 variance analysis 167 78 target costing 131 variable costs 111, 111 credit checking 218 current assets 35 36 current ratio 347 damage and spoilage (inventory cost) 211 daybooks 13 14 cashbook 2 3, 13 14 journal 13, 14 purchases daybook 13 returns inwards daybook 13 returns outwards daybook 13 sales daybook 13 debentures 39 debt factoring 219 20 debt management 216 20 aged debtors schedule 217 18 cash discounts 218 19 cash sales 220 credit checking 218

368 Index debt factoring 219 20 invoice management 217 legal action 220 debt/equity ratio 351 Deloitte Touche Tohmatsu 266 depletion (of an asset) 56 depreciation 55 60, 75 asset disposal 59 60 and the balance sheet 58 59 cost of asset 56 depreciation method 56 58 reducing balance 57 58 straight line 57 expected useful life 56 depletion 56 obsolescence 56 residual value 56 development expenditure 272 direct costs 108 09 direct expenses 109 direct labour 109 direct materials 108 directors report 266 67 discounted cash flow 230 34 compound interest 231 discount factors 232, 232 weighted average cost of capital (WACC) 232 33 discounted payback 238 discounts 61, 62 dividend cover (ratio) 354 55 dividend yield (ratio) 355 dividends per share (DPS) 354 double-entry bookkeeping 3, 4, 4 8 accounting software 14 examples 5 8 rules of 4 5, 5 three-column accounts 14, 14 doubtful debts 61 earnings per share (EPS) 354 economic order quantity (EOQ) 212 13 efficiency ratios 336, 342 46 asset turnover 342 43 inventory turnover 344 trade payables days 345 trade receivables days 344 45 equity 40 Ernst & Young 266 example budget 196 200 Financial Accounting Standards Board (FASB) 297 financial records see bookkeeping Financial Reporting Council 294, 294 Financial Reporting Standard for Smaller Entities (FRSSE) 303 07 Financial Reporting Standards (FRSs) 79, 295, 303 draft FRS 2 303 financial statements 12, see also balance sheet; income statements; statement of cash flows first in, first out (FIFO) 274, 275 fixed costs 109 10, 110 stepped fixed costs 110, 110 gearing ratios 336, 350 53 debt/equity ratio 351 interest cover 353 weighted average cost of capital (WACC) 352 53 general ledger 13 general reserve 252 Generally Accepted Accounting Principles (GAAP) 78 79, 293 94, 295, 309 10 future of 301 02 global overhead recovery 114 16 going concern (accounting concept) 74 Grant Thornton 266 historical costs (accounting concept) 78 IN01 application form 246, 248 income statements 21 32 classifying expenditure 27 capital expenditure 27 capital receipts 27 revenue expenditure 27 revenue receipts 27 definition of 21 profit 21 24 cost of goods sold 22 23 gross profit 22 24 net profit 24 review questions 28 32 and the trial balance 25 incremental budgeting 200 01 indirect costs 109 intangible assets 35 interest cover (ratio) 353 internal rate of return (IRR) 235 37, 237 International Accounting Standard (IAS) 1 267 68, 269, 276, 278, 281, 283 International Accounting Standard (IAS) 2 274 International Accounting Standard (IAS) 7 284, 315, 318

Index 369 International Accounting Standard (IAS) 16 269 70 International Accounting Standard (IAS) 18 279 80 International Accounting Standard (IAS) 27 274 International Accounting Standard (IAS) 28 273 International Accounting Standard (IAS) 37 275 International Accounting Standard (IAS) 38 270, 271 International Accounting Standard (IAS) 40 270 International Accounting Standards Board (IASB) 73, 79, 294, 296 97 Conceptual Framework 73 International Financial Reporting Standard (IFRS) 5 273 International Financial Reporting Standards (IFRS) Foundation 295, 296 International Financial Reporting Standards (IFRSs) 79, 296, 308 inventory costs 210 16 buffer level 192, 215 bulk discounts 214 damage and spoilage 211 economic order quantity (EOQ) 212 13 just-in-time management 215 16 monitoring costs 211 obsolescence 211 reorder level 215 storage costs 211 theft 211 inventory turnover (ratio) 344 investor ratios 336, 353 56 dividend cover 354 55 dividend yield 355 dividends per share (DPS) 354 earnings per share (EPS) 354 limitations of 357 58 price/earnings (P/E) ratio 355 56 issued share capital 39 40 job costing 124 journal 13, 14 just-in-time management (inventory) 215 16 KPMG 266 labour efficiency variance 170 labour variances 170 Late Payment of Commercial Debts (Interest) Act 1998 219 liabilities 1, 37 39 accruals 38 bank overdraft 37 38 current liabilities 37 debentures 39 non-current liabilities 38 39 taxation owing 38 trade payables 37 life-cycle costing 131 limited companies, accounting for 245 61 annual return 263 92 auditor s report 265 66 contents overview 264 65 directors report 266 67 International Accounting Standard (IAS) 1 267 notes to the financial statements 284 86 review questions 290 92 statement of cash flows 284 statement of changes in equity 282 84 statement of comprehensive income 278 82 statement of financial position 268 78 worked example 287 89 bonus issue 258 59 capital 251 financial statements 250 56 balance sheet 251 54 income statements 250 51 formation of 246 limited liability, meaning of 245 46 private company limited by guarantee 247 private limited companies 247 private unlimited company 247 public limited companies 246 47 reserves 252 53 capital reserves 252 53 revaluation reserve 253 revenue reserves 252 share premium 253 54 review questions 260 61 rights issue 256 58 share capital 248 50 convertible shares 250 dividends 248 ordinary shares 248 49 preference shares 249 50 Limited Liability Partnership Act 2000 91 liquidity ratios 336, 347 50 acid test ratio 348 49 current ratio 347

370 Index manufacturing businesses, accounting for 83 86 cost of manufacturing goods 85 example accounts 85 86 factory overheads 84 85 prime cost 84 review questions 100 marginal costing 137 63 and break-even analysis 139 46 break-even chart 140 41, 141 break-even output level 142 44 limitations of 145 46 margin of safety 144 45 total costs 140, 140 total revenue 139, 139 and closing down a business segment 154 57 contribution 138 and make-or-buy decisions 149 52 and optimal production plans 146 49 review questions 159 63 and special order decisions 152 54 vs absorption costing 157 59 master budget 187, 192 materiality (accounting concept) 76 materials budget 187 materials variances 168 69 materials price variance 169 materials usage variance 169 money measurement (accounting concept) 76 77 multi-department overhead recovery 116 net present value (NPV) 234 35 net realizable value 74 nominal ledger 13 non-recourse factoring 220 not-for-profit organizations, accounting for 91 99, 92 balance sheet 98 99, 99 income and expenditure account 95 98 income sources bar trading 94 95 subscription fees 93 94 review questions 103 07 statement of affairs 98, 99 objectivity (accounting concept) 77 78 obsolescence (depreciation) 56 obsolescence (inventory cost) 211 operating cycle see working capital ordinary shares 248 49 overhead absorption rate (OAR) 121 22 overhead variances 173 75 Pacioli, Luca 4 partnerships, accounting for 86 91 balance sheet 90, 90 capital accounts 88 current accounts 88 example accounts 89 90 interest on capital 87 interest on drawings 88 limited liability partnerships 91 partnership salaries 87 profit sharing 88 review questions 101 02 preference shares 249 50 price variances 168 price/earnings (P/E) ratio 355 56 PricewaterhouseCoopers 266 prime cost 84 private company limited by guarantee 247 private limited companies 247 private unlimited company 247 process costing 127 28 production budgets 187, 190 92 profit 21 24 cost of goods sold 22 23 gross profit 22 24 net profit 24 profit margin (ratio) 338 40 gross profit margin 338 profit maximization 21 profitability ratios 336 42 profit margin 338 40 return on capital employed (ROCE) 337 return on equity (ROE) 337 38 prudence (accounting concept) 74 public limited companies 246 47 purchases daybook 13 purchases ledger 13 ratio analysis 335 64 efficiency ratios 336, 342 46 asset turnover 342 43 inventory turnover 344 trade payables days 345 trade receivables days 344 45 gearing ratios 336, 350 53 debt/equity ratio 351 interest cover 353 weighted average cost of capital (WACC) 352 53 investor ratios 336, 353 56 dividend cover 354 55 dividend yield 355 dividends per share (DPS) 354 earnings per share (EPS) 354

Index 371 limitations of 357 58 price/earnings (P/E) ratio 355 56 liquidity ratios 336, 347 50 acid test ratio 348 49 current ratio 347 profitability ratios 336 42 profit margin 338 40 return on capital employed (ROCE) 337 return on equity (ROE) 337 38 review questions 359 64 realization (accounting concept) 77 receipts and payments account 2, 2 recognition (accounting concept) 77 recourse factoring 220 reorder level 215 research expenditure 272 reserves 252 53 capital reserves 252 53 revaluation reserve 253 revenue reserves 252 share premium 253 54 retained earnings 252 return on capital employed (ROCE) 337 return on equity (ROE) 337 38 returns inwards daybook 13 returns outwards daybook 13 review questions 311 rights issue 256 58 sales budget 187 sales daybook 13 sales ledger 13 sales variances 173 Sarbanes-Oxley Act 266 scrip issue see bonus issue Securities and Exchange Commission (SEC) 301 separate entity (accounting concept) 76 service costing 128 share capital 39 40, 248 50 convertible shares 250 dividends 248 ordinary shares 248 49 preference shares 249 50 single-entry bookkeeping 2 4 multi-column cashbook 3, 3 problems with 3 4 receipts and payments account, 2, 2 specific order costing 123 27, 124 batch costing 124 25 contract costing 125 27 job costing 124 standard costing 165 81 review questions 179 81 standards 166 67 attainable 166 basic 166 current 166 ideal 166 review of 166 67, 167 variance analysis 167 78 budget flexibility 171 73 interpreting variances 175 76 interrelationships of variances 176 78 labour variances 170 materials variances 168 69 overhead variances 173 75 price variances 168 sales variances 173 volume variances 168 statement of affairs 98, 99 statement of cash flows 284, 313 33 cash flow from financing activities 319 cash flow from investing activities 318 19 cash flow from operating activities 316 18 direct method 316 indirect method 316 17 interest and dividends 318 cash vs profit 313 15 capital expenditure 314 loans 315 non-cash profit 314 overtrading 314 foreign exchange transactions 319 20 review questions 325 33 worked example 320 24 statement of changes in equity 282 84 statement of comprehensive income 278 82 statement of financial position see balance sheet Statements of Recommended Practice (SORPs) 295 Statements of Standard Accounting Practice (SSAPs) 79, 295, 303, 310 storage costs (inventory) 211 sunk costs 224 T accounts see double-entry bookkeeping tangible assets 34 target costing 131 theft (inventory cost) 211 total labour cost variance 170 total materials cost variance 169 trade payables 37 trade payables days (ratio) 345 trade receivables 36 trade receivables days (ratio) 344 45

372 Index Urgent Issues Task Force (UITF) 294, 295 variable costs 111, 111 variance analysis 167 78 budget flexibility 171 73 interpreting variances 175 76 interrelationships of variances 176 78 labour variances 170 materials variances 168 69 overhead variances 173 75 price variances 168 sales variances 173 volume variances 168 volume variances 168 wage rate variance 170 weighted average cost of capital (WACC) 232 33, 352 53 working capital 207 22 cash management 221 debt management 216 20 aged debtors schedule 217 18 cash discounts 218 19 cash sales 220 credit checking 218 debt factoring 219 20 invoice management 217 legal action 220 inventory costs 210 16 buffer level 192, 215 bulk discounts 214 damage and spoilage 211 economic order quantity (EOQ) 212 13 just-in-time management 215 16 monitoring costs 211 obsolescence 211 reorder level 215 storage costs 211 theft 211 liquidity ratios 210 review questions 222 trade payables 220 21 working capital cycle 207 09, 208 zero-based budgeting 201 02